Stocks weaken, dollar gains amid Fed hike talk

NEW YORK (Reuters) - Stocks around the world sold off on Thursday, while the U.S. dollar gained, pressuring oil and other commodities, as investors absorbed the possibility that the U.S. Federal Reserve will raise interest rates in the near term.

Oil prices erased most losses as supply worries offset the drag from the dollar.

Financial markets were adjusting to the minutes of the Fed April meeting, released on Wednesday, in which the U.S. central bank opened the door to a rate hike in June, catching investors off guard.

Speaking on Thursday, New York Fed President William Dudley said the U.S. economy could be strong enough to warrant an interest rate increase in June or July.

“We are on track to satisfy a lot of the conditions” for a rate increase, Dudley said.

Traders were projecting a 32-percent chance the Fed would raise rates in June, according to the CME FedWatch tool, up from 15 percent on Tuesday. A majority now expect a rate hike at the July meeting.

“The Fed seems to think the economy is quite a bit stronger than some market pundits and maybe investors in general think,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland.

“Not only is there the concern that they will, in fact, do damage to the economy, but also one more step in removing the easy money that clearly has been a benefit for rising asset prices over the last few years,” McCain said.

The Dow Jones industrial average .DJI fell 91.22 points, or 0.52 percent, to 17,435.4, the S&P 500 .SPX lost 7.59 points, or 0.37 percent, to 2,040.04 and the Nasdaq Composite .IXIC dropped 26.59 points, or 0.56 percent, to 4,712.53.

The Dow and S&P touched roughly two-month lows before paring losses. Financials .SPSY, which tend to benefit in a rising rate environment, shed 0.9 percent after posting their best day in a month on Wednesday.

The global index is off about 2 percent for 2016. Concerns about the global economy persist and investors are responding to diverging policies between the Federal Reserve and other major central banks.

The Fed comments are “affecting the markets today and I think it’s going to continue to affect the markets over the next few weeks as we inch closer towards June,” said Jake Dollarhide, chief executive officer of Longbow Asset Management in Tulsa.

The dollar .DXY rose 0.3 percent against a basket of currencies, adding to gains after hitting its highest point since late March on Wednesday.

Oil prices settled largely unchanged as worries about Canadian and Nigerian supply outages offset the impact of a stronger dollar. A stronger dollar makes commodities denominated in greenbacks more expensive for holders of other currencies.

U.S. crude Clc1 settled down 3 cents at $48.16 a barrel. Benchmark Brent’s front-month contract, July LCON6, settled down 12 cents at $48.81 a barrel. It had fallen more than 3 percent during the session.

U.S. Treasury prices rose, rebounding from Wednesday’s selloff. Yields, which move inversely to prices, had climbed to their highest in about two months for shorter-dated maturities after the Fed’s minutes were released.

Benchmark 10-year U.S. Treasuries US10YT=RR rose 10/32 in price to yield 1.8487, down from 1.883 percent late on Wednesday.

Spot gold XAU= was down 0.4 percent, and touched a three-week low.

Additional reporting by Dion Rabouin and Barani Krishnan in New York, Marc Jones in London; Editing by Catherine Evans and Nick Zieminski